08 Jul 2024

What is an annuity?

An annuity gives you a regular, guaranteed income when you retire. You can buy one once you’re 55 (or 57 from April 2028), using money from your pension pot. Depending on the type of annuity you go for and the product options you choose, you can get a guaranteed income that:

Lasts for the rest of your life
Rises over the life of your annuity
Goes to someone else when you die

Once you’ve set up an annuity you can’t make any changes to it.

Annuity calculator

It’s simple to use, and provides a helpful estimate of your potential guaranteed income in retirement.

What does annuity mean?

Once an annuity's up and running you'll start getting regular, guaranteed payments. You agree how much those payments will be when you set up your annuity. Different providers will offer different annuity rates, so it’s always worth shopping around. Our annuity rates article will tell you more.

But the meaning of annuity is more than just financial. Because of those guaranteed payments, the real annuity meaning is often just… peace of mind. In this article we'll be looking at how a lifetime annuity works. You could also consider a fixed-term annuity, which works a bit differently.

Is an annuity a good idea?

As with any financial product, whether or not an annuity is a good idea depends on your personal circumstances and goals. If you’re the right age and looking for a guaranteed income, an annuity could be right for you. But if you want more flexibility it could be better to go for another choice, like drawdown. Our Annuity vs drawdown article compares the two in more detail.

We’ve put together a list of pros and cons for lifetime annuities below. We have a separate article on the pros and cons of fixed term annuities.

Annuity pros and cons

Annuity pros	Annuity cons
You can choose between different annuity benefits and providers	Once you’ve made your choices and set up your annuity, you can’t make any changes to it
An annuity gives you a guaranteed income until you die	If you die sooner than expected, you might pay more for your annuity than you get out of it
Annuity rates* have gone up 14% in the last two years, making them more attractive	Annuity rates vary between providers, so make sure you shop around before buying
Annuities are a reliable, well-established type of product	Other ways of spending your pension pot - like drawdown - might give you more income. This will depend on investment markets

*Based on our average annuity rates at July 2024 for ages 65-80 with a £40K pension pot, 5 year guarantee period and 50% dependant’s pension.

How much does an annuity cost?

Understanding what kind of retirement income you could get for your pension pot is an important part of retirement planning. We look at what you could get for your pot.

What happens to an annuity when you die?

When you die, annuities usually just stop paying out. But when you’re setting up your annuity you might be able to ask your provider to make other arrangements. After you die, they could:

Switch some or all of your payments to a loved one
Pay out a lump sum to them

To find out more, check out our What happens to annuities when you die article.

What should I do next?

This article is very much a starter for ten. To dig deeper, you can:

Find out how much our products could pay you with our Annuity Calculator
Get quotes from across the whole market at our AnnuityReady site
Get free guidance at the Government’s Pension Wise site
Find an independent financial adviser at the Unbiased site
We also offer a Retirement Advice service

FAQs

Do you pay tax on annuity income?

HMRC treats any annuity income you receive as part of your taxable income, which also includes your State Pension. Any money you get above your personal allowance is taxable. The amount of tax you pay will depend on your personal circumstances and may change in the future.

What are the different types of annuities?

People often talk about annuities meaning just a lifetime annuity. In fact, you can choose between many different types of annuity. Each has its own specific benefits – the full list is:

Lifetime annuities
Fixed term annuities
Joint lifetime annuities
Enhanced annuities
Deferred annuities
Variable annuities
Immediate needs annuities
Purchased life annuities

We talk through them all in detail in our Types of annuity article.

What is the difference between a pension and an annuity?

A pension is a tax-efficient way of investing for your retirement, often with the help of your employer or the government. As you invest in your pension you build up your pension pot.

When the time comes to retire, you can spend some or all of your pension pot on an annuity. An annuity gives you a guaranteed income for the rest of your life or for a fixed period.

To find out more about annuities, take a look at our How annuities work article.

Which is better – annuity or drawdown?

As with any financial decision, it depends on your goals and circumstances. For an in-depth comparison of the two types of product, check out our Annuity vs drawdown article.

Annuity vs drawdown – what's the difference?

Many of us have spent the last few decades planning and carefully saving for the things that are important to us, whether that’s life’s luxuries, our mortgages and bills, or our plans for the future. As we get older we might have different priorities, but our financial planning for retirement should be just as important.

Enhanced annuities explained

Later life health problems can make enjoying your well-deserved retirement years harder than it should be. They can hit your finances too, pushing up the cost of day-to-day living and creating new care and support costs.

Types of annuity

There are several types of annuity including fixed, variable, deferred and immediate. Find out which annuity type might be right for you.